The answer was provided in the first response to your post by Alan. I'll repeat it here: "If a function is the sum of two functions, so are its derivatives. (google: linear operator)." You are decomposing the total option premium into two parts - intrinsic value and time premium. No one uses the ter...

Seeing as correlations are typically computed using historical data (more on that in a moment), I wouldn't be inclined to bet the shop on any such numbers in the current environment as we're surely experiencing some kind of stochastic regime shift at present. Having said this, Markit's consensus pri...

If the underlying bonds do not trade at all it would be a challenge to find highly correlated tradeable bonds as hedge candidates because without trade how would you ascertain the correlation? Methinks more market specifics are required.

If one compares an apple to an orange there should be no surprise that they're not the same. When talking about swaptions, one is naturally interested in the behaviour of forward-starting par rates corresponding to the swaptions in question. I think that is the point you are making. Given a complet...

“ As you approach the maturity of a swaption, the points of the yield curve that forms the swap rate are not fixed. Those points start sliding toward time=0.” How is aging of bespoke swaps relevant when one is dealing with the implied vols of ATM par swap rates that are quoted as a constant matu...

I am unclear on the concept of dimensionality when it comes to using Monte Carlo for option valuation and what I am reading has unfortunately not made things any clearer. Starting as simply as possible, simulating the terminal price at option maturity of a single underlying in one time step jump f...

A concrete example of your problem faced frequently by middle offices would be the following - you have two traded assets so they both have a historical price and return history. One asset has liquid options traded on it but the other has none. Your front office wants to trade an option on the asset...

Alan, my work was a failed attempt at a PhD thesis at what I consider to be a then narrow minded and unprofessional department in one of Canada's universities. I had bought data from the CBOE and had positive empirical results. Anyway, rather than continue trying to reason with a brick wall, I just ...

I've only just downloaded your paper, so these are only my first thoughts. In a similar vein to Ross Recovery, you are imposing structure on utility to frame the model. Why no mention of Ross? Or Peter Carr? In the late 1980's I took a rather different and arguably more direct approach that impose...